Mittal School of Business

Course Code: MGNM832 Course Title: RESEARCH METHODOLOGY-II

Course Instructor: Dr. Tawheed Nabi Academic Task No.: 01

Academic Task Title: Group Assignment Date of submission: May 10’2023

Student Name: Anshul Dhiman Section: Q2244

Mentor’s Name: Dr. Monika Kalani

TOPIC: THE IMPACT OF MACROECONOMIC VARIABLES ON STOCK MARKET PERFORMANCES

Declaration:
I declare that this Assignment is our teamwork. We have not copied it from any other
student’s work or from any other source except where due acknowledgement is made
explicitly in the text, nor has any part been written for us by any other person.

PEER RATING

Name Registration Roll number Section Group Peer rating

number Name
Krishna Pandey 12204488 RQ2245A17 Q2244 TAW11 10

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 Krish Kumar 12202680 RQ2245A19 Q2244 TAW11 0

Anshul Dhiman 12206128 RQ2245B35 Q2244 TAW11 09

Student Signature Mentor’s Signature

TOPIC: THE IMPACT OF MACROECONOMIC VARIABLES ON STOCK

MARKET PERFORMANCES

INDEX

Sl. Topic Page number

Number

1 Abstract 3

2 Introduction 3-6

3 Description of variables 6-7

4 Literature review 7-9

5 Research Gap 10-11

6 Data & Methodology 11-14

7 Objective 14-15

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8 Analysis & Interpretation 15

9 Findings & Conclusion 16-18

10 References 19

1. ABSTRACT
The study's goal is to empirically examine how macroeconomic indicators affect the performance
of the Indian stock market. Inflation, interest rates, money supply, industrial production, and
exchange rates in India are among the macroeconomic factors considered. The investigation spans
the years April 2005 and April 2021. The analysis discovered a long-term, adverse association
between stock return and industrial production, interest rates, and currency rates. More specifically,
the performance of the stock market is significantly impacted by the exchange rate. At the same
time, inflation exhibits a negative short-term relationship with the stock market return. Though
money supply has a positive relationship, the magnitude is insignificant.
The purpose0f the stock market is essential for raising savings, funding corporate needs, and giving
investors and the corporate sector access to liquidity. Market liquidity helps the country's economy
grow and thrive by improving how resources are distributed. In turn, the stock market is impacted
by several economic factors. The growing integration of India's capital markets into the global
economy has raised India's competitiveness on a global scale. India has received investment grade
ratings from the international rating agencies, which indicates somewhat fewer sovereign risks. To
safeguard investors, the Securities and Exchange Board of India (SEBI), the country's securities
market's regulating body, was founded in 1992. The Controller of Capital Issues (CCI) was
established that year. which eliminated managerial oversight of the cost of fresh equity issues. The

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National Stock Exchange began offering online trading in 2000, and less than ten years later, the
Indian financial markets accepted the use of technology, which greatly enhanced trade volumes.
The stock markets have experienced a steep upswing and quick expansion.
This essay will examine the potential effects of macroeconomic variables on the Sensex, including
FDI, GDP, money supply, interest rate structure, inflation, gross capital creation, and trade balance.
OLS multivariate linear regression and descriptive statistics would be the instruments used to
examine this goal.

2. INTRODUCTION
The most significant institutional and practical tool for economic change is the financial system. It
aids in accelerating the rate of savings, mobilising the savings of those who set aside a portion of
their income, and directing those resources into profitable endeavours.Financial markets are
crucial to every economy, and for a nation to grow and dominate the global market, both primary
and secondary markets must be established. These markets are essential for supplying investors
and the corporate sector with liquidity. Market liquidity helps the country's economy grow and
thrive by improving how resources are distributed. Every country should concentrate on these
things in order to retain its economic and social stability and level.
.Every nation should pay attention to its financial system. In order to finance their BOP (balance
of payments) and accelerate their development agenda for social and economic stability,
economies look to the financial markets. The economy and stock market are intertwined, and a
number of economic factors have direct or indirect effects on the nation's financial system. The
idea that macroeconomic factors have an impact on the stock market has been advanced by
numerous experts. In reality, since the 1980s, academics, investors, and stock market regulators
have all shown a keen interest in this topic. Whether stock price variations are affected by
economic changes or stock market performance aids in fostering economic growth has always
been a topic of discussion. It has been the focus of empirical study.

2.1 Factors influencing the Stock market performance

Macroeconomic factors: Macroeconomic variables such as GDP, inflation, interest rates, money supply, and
exchange rates can significantly impact stock market performance.

2.1.1 Inflation rate

Inflation rate refers to the percentage increase in the general price level of goods and services over
a period of time, usually a year. In other words, it measures the rate at which the purchasing power
of money is decreasing over time. Inflation is typically calculated by comparing the average price
of a basket of goods and services in the current period with the average price of the same basket in
a base period. The resulting percentage change in price levels is the inflation rate.

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the impact of inflation on the stock market can be complex and multifaceted. The specific impact
of inflation on the stock market may depend on the level and persistence of inflation, as well as
broader macroeconomic factors.

2.1.2 Interest rate

Inflation can lead to higher interest rates, which can impact the stock market in different ways.
When interest rates rise, it becomes more expensive for companies to borrow money, which can
decrease their profits and impact their stock prices. Higher interest rates can also make bonds more
attractive to investors, which can lead to a shift in investment away from stocks, leading to a
decrease in stock prices.
In financial economics, there are many research examining the relationship between interest rates
and the stock market.Numerous studies have discovered a weak and significant correlation between
these two variables, including Abugri (2008), Asprem (1989), Ibrahim and Musah (2014), Ibrahim
and Shah (2012), Maysami and Koh (2000), Mukherjee and Naka (1995), talla tagne josep (2013),
Wongbangpo and Sharma (2002), and Majid (2007). They contend that as interest rates rise, stock
market investors frequently go to the debt market. Additionally, a high interest rate results in a high
discount factor, which is predicted to have a negative impact on the stock market.

2.1.3 Exchange rate

Exchange rate refers to the value of one currency in relation to another currency. It represents the
price at which one currency can be exchanged for another currency. Exchange rates are quoted as
currency pairs, such as USD/CAD or EUR/USD, which indicate how many units of one currency
can be exchanged for one unit of the other currency.

Exchange rates are determined by the supply and demand for a currency in the foreign exchange
market. Factors that can impact the supply and demand for a currency include economic indicators,
such as interest rates, inflation, and GDP growth, as well as political and geopolitical events.
Exchange rates have a significant impact on international trade and investment. When the value of
a country's currency appreciates, its exports become more expensive and less competitive, while its
imports become cheaper. This can lead to a decrease in demand for exports and an increase in
demand for imports, leading to a decrease in economic growth. Conversely, when the value of a
country's currency depreciates, its exports become cheaper and more competitive, while its imports
become more expensive. This can lead to an increase in demand for exports and a decrease in
demand for imports, leading to an increase in economic growth.
Exchange rates also impact international investments. When the value of a currency appreciates,
foreign investments become more expensive and less attractive to investors, while domestic
investments become more attractive. Conversely, when the value of a currency depreciates, foreign

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investments become cheaper and more attractive to investors, leading to an increase in foreign
investment inflows.
There is a theoretical connection between the stock market and the currency rate. The link between
the exchange rate and the capital market may follow a flow model, according to Dornbusch and
Fisher (1980). This implies that the stock price may experience volatility as a result of changes in
the exchange rate. Numerous studies, including those by Asprem (1989), Mukherjee and Naka
(1995), and Wongbangpo and Sharma (2002), have discovered a positive correlation between stock
market performance and

Overall, exchange rates have a significant impact on the global economy and international trade and
investment.

2.1.4 GDP
Gross Domestic Product (GDP) is the monetary value of all goods and services produced within a
country's borders during a specific period. It is considered an essential indicator of a country's
economic health and growth. GDP can have a significant impact on the stock market because it
reflects the overall health of the economy. A strong GDP growth rate indicates that the economy is
expanding, and businesses are making more profits, which can lead to higher stock prices.
Conversely, a weak or negative GDP growth rate can signal economic contraction, leading to lower
business profits and stock prices. However, it is important to note that GDP is just one of many
factors that can influence the stock market, and its impact can vary depending on other factors such
as interest rates, inflation, and global economic conditions.

2.1.5 Money supply

Money supply refers to the total amount of money in circulation in an economy, including currency,
bank deposits, and other liquid assets. The money supply can have an impact on the stock market
in several ways.
o When the money supply increases, it can lead to inflation, which can have a negative impact
on stock prices. As inflation rises, investors become more cautious, and the purchasing
power of the money declines, which can lead to lower stock prices.
o Changes in the money supply can affect interest rates. When the money supply increases, it
can lead to a decrease in interest rates, which can make it easier for businesses to borrow
money and invest in growth, leading to higher stock prices.
o Changes in the money supply can also affect the value of the currency. If the money supply
increases rapidly, it can lead to a devaluation of the currency, making exports more attractive
and boosting the earnings of export-oriented businesses, which can lead to higher stock
prices.

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Overall, the relationship between money supply and the stock market can be complex and depend
on various factors such as inflation, interest rates, and global economic conditions.

3. DESCRIPTION OF VARIABLES
3.1 SENSEX
A metric used to compare share values on the Mumbai (Bombay) Stock Exchange. It is the variable
on which we rely. Analysts, investors, and traders utilise it in various research to determine how the
economy will behave. We have thought about BSE, It is a free-float marketweighted index of the
Bombay Stock Exchange's 30 long-standing and financially strong companies. The 30 component
businesses, among of the biggest and most liquid equities, comprise a cross-section of the Indian
economy's main industrial sectors. S&P BSE SENSEX, the first equity index in the nation to be
launched (Base Year: 1978–1979 = 100), is taken into consideration for this study.

3.2 Market Capitalisation

The entire dollar amount of shares traded on the stock market is referred to as market capitalization.
It's explained multiplied by the share prices as the number of shares to be issued. Companies can
be categorised into three market cap categories: large, midsize, and small. This is one of study's
dependent variable

3.3 Oil Prices

Shifts in the price of crude oil on a global scale are frequently cited as a key element in determining
why stock prices fluctuate. International crude oil prices per 1000 barrels have been utilised for the
analysis.

3.4 GDP
Economic growth is the rise in the market value of the products and services generated by an
economy over time, adjusted for inflation. The Gross Domestic Product (GDP), which is frequently
used to gauge the expansion of real economic activity, has been subjected to numerous research. It
is regarded as one of the key factors influencing stock market performance that should be retested
in light of the evolving situation.

3.5 FII
An investor or investment fund making a foreign institutional investment (FII) invests in a nation
other than the one in which it is incorporated or has its headquarters. India is perhaps the country
where the phrase "foreign institutional investor" is most frequently used to describe foreign

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investors in that country's financial markets. The levels of FIIs have the capacity to impact the
stock market.

Inflation CPI: here inflation is measured taking into consideration the consumer price index.
Lending rate: The lending rates at which borrowings can be availed.
Exchange Rate: The exchange rate is the value of a country's currency vs. that of another country.

4. LITERATURE REVIEW
4.1 Various studies have been done in the past to predict the relationship between stock market
movement and macroeconomic variables. But in the changing scenario, whether there is a
relationship between stock market and macroeconomic variables exist or not should be tested.
According to a study by Chen et al. (1986), it was found that equity returns are significantly
explained by a set of macroeconomic variables for developed countries. The study included various
macroeconomic variables like growth in industrial production, changes in the risk premium, twists
in the yield curve, measures of unanticipated inflation and changes in expected inflation during
periods of volatile inflation.

4.2 (Sudhakaran and Balasubramanian, 2016) investigated the impact of money supply, inflation
rate, foreign direct investments (FDI), foreign exchange reserves, the index of industrial production
(IIP), and foreign portfolio investments (FPI) on the BSE Bankex returns over a period of ten years,
from April 2005 to March 2015. According to the investigation, FDI and foreign exchange reserves
have a big impact on BSE Bankex returns.

4.3 (Parmar, 2013) investigated how several macroeconomic factors affected the Indian securities
exchange. The macroeconomic variables that were taken into consideration were the reverse repo
rate, CRR, SLR, Repo rate, swelling rate, CPI, Index of Modern Generation, gold rate, oil rate, and
swapping scale to identify their relationship to stock exchange growth and predict future
showcasing behaviour. The primary goals of this inquiry are to identify the relationships between
macroeconomic factors and their effects. checking for a relationship between macroeconomic
parameters and securities exchange records. The precise testing window was selected as January
2004 to December 2012. In order to identify the crucial link between the macroeconomic factors
and the SENSEX, each factor is tested one at a time.

4.4 Various studies have shown that macroeconomic factors such as industrial production, inflation,
interest rates, exchange rate, money supply, and policy rates significantly influence the performance
of the stock market in India. The long-term performance of the Indian stock market depends on
domestic macroeconomic dynamics, and favorable market conditions are more critical than policy

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rates in attracting investment. The studies suggest a significant correlation between macroeconomic
indicators and stock market performance in India, both in the short and long term. These findings
can help policymakers, investors, and analysts in making informed decisions regarding investment
in the Indian stock market.

4.5 (Gurloveleen and Bhatia (2015) The impact of macroeconomic conditions on the operation of
the Indian Stock Market was assessed in an empirical study. The study used one stock exchange
index, the BSE 500, as a dependent variable and monthly data for ten selected macroeconomic
parameters as independent variables. The data was analysed using the Augmented Dickey Fuller
(ADF) Test, Multiple Regression, and Granger Causality Tests, and it was discovered that certain
factors have no effect on the BSE 500 index over the chosen time period. (Aanchal, 2017)
conducted an empirical study to analyse the impact of macroeconomic factors on the Indian Stock
Market and determine whether changes in these parameters will also affect India's securities market.
A measure for securities exchange execution is taken using CNX Nifty 50 and five macroeconomic
parameters. The analysis uses the data for a considerable amount of time, from 2004 to 2015. The
Augmented Dicky Fuller Test was used to analyse the data and determine the information's unit
root. Correlation and the Granger Causality Test were then connected to determine the relationship
between the factors. In the end, it is found that the five criteria looked at and the Indian securities
exchange have a favourable association.

4.6 (Samveg, 2012) analysed the effects of selected 8 macroeconomic variables on the Indian Stock
Market using monthly data covering the period from January 1991 to December 2011. To test the
unit, the Data is analysed using the Augmented Dicky Fuller Test. It was established that variables
and stock market indices had a long-term relationship at that point thanks to the Johansen
Cointegration Test, the Granger Causality Test, and the Vector Error Correction Model. The study
also showed that the exchange rate has a causal relationship with stock market indices.

4.7 (Rakesh, 2013), Using PCA, researchers examined the effects of 12 macroeconomic variables
on the Indian stock market from January 2001 to May 2013, grouping the variables into three
categories: macroeconomic environment, industrial performance, and policy rates. They
discovered that the market is more dependent on a positive macroeconomic environment and that
maintaining full-scale soundness requires the state to make reasonable efforts. Additionally, the
securities market responds to unforeseen events in the economy as well as the execution of the
firm's specified elements.

4.8 (Kotha and Sahu, 2016) Using PCA, researchers examined the effects of 12 macroeconomic
variables on the Indian stock market from January 2001 to May 2013, grouping the variables into
three categories: macroeconomic environment, industrial performance, and policy rates. They

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discovered that the market is more dependent on a positive macroeconomic environment and that
maintaining full-scale soundness requires the state to make reasonable efforts. Additionally, the
securities market responds to unforeseen events in the economy as well as the execution of the
firm's specified elements.

4.9 (Garg & Kalra, 2018) investigated how macroeconomic issues affected the Indian stock market
from 1991 to 2017. Examining the relationship between selected macroeconomic indicators and
the Indian securities exchange was the goal of the inquiry. The findings show that the selected
macroeconomic parameters had a considerable impact on the value returns of the share trading
system. The results suggest a positive correlation between the sensex and macroeconomic factors,
with the exception of average inflation and the unemployment rate, which have a negative
correlation.

4.10 (Nisha, 2015) In order to extend the previously assumed relationship between stock returns
and macroeconomic factors to the expanding Indian business sector, study combined both global
and local components. The Bombay Stock Exchange (BSE) stock returns were examined using
time-arrangement analysis and Vector Auto Regression (VAR), and it was discovered that the loan
fee, gold value, conversion scale, and cash supply have a significant impact on BSE stock returns.
Additionally, a strong correlation between the global macroeconomic component and the world
value record is also discovered, suggesting that the BSE and the global financial markets are always
being reconciled. Finally, the analysis includes administrative and arrangement ideas, future
research directions, and restrictions from the perspective of India.

4.11 (Venugopal and Sahithi, 2018) examined the relationship between a few macroeconomic
variables, including the call cash rate, cash supply (M3), swapping scale, gold and silver prices,
foreign exchange stores, buyer value list as an intermediary for inflation, and the stock prices of 30
companies that influence the Bombay Stock Exchange's Sensex (BSE30), the main economic
indicator for India. It makes an effort to understand the degree to which certain macroeconomic
factors have an impact on stock price and vice versa. Information on the time arrangement is used
in this examination. The necessary data is acquired from reliable optional sources including the

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RBI, BSE, and other international locations. Granger causality test and OLS technique were used
to forecast the results of this examination, which covered the multi-month period from January
2000 to August 2000. A major impact on the Indian BSE 30 Index has also been suggested by newly
discovered call money rate, exchange rate, and forex holds. BSE Sensex, macroeconomic
considerations, stock prices, OLS technique, and Granger Causality test are common buzzwords.

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5. RESEARCH GAP
The research gap of this study is that even though many studies have done this field, we are
considering the macroeconomic variables such as inflation, exchange rate, industrial production
and money supply, and the stock market return.
While there have been many studies conducted on the relationship between macroeconomic
variables and stock market movement, there are still several research gaps that need to be
addressed.

5.1 One such research gap is the need for more country-specific studies. Most of the existing studies
have focused on developed countries, while there is a lack of research on emerging and developing
economies. Since these countries often have different macroeconomic conditions and market
structures, more research is needed to better understand the relationship between macroeconomic
variables and stock market movement in these contexts.

5.2 Another research gap is the need for more comprehensive and sophisticated methods for
analyzing the relationship between macroeconomic variables and stock market movement. Many
existing studies have used simple regression models, which may not fully capture the complex and
dynamic nature of the relationship between these variables. More advanced statistical methods,
such as vector autoregression (VAR) models or structural equation modeling (SEM), may provide
more accurate and nuanced insights into this relationship.

5.3 Furthermore, there is a need for more studies that examine the impact of specific
macroeconomic events or shocks on the stock market. For example, studies could investigate the
impact of a sudden increase in inflation, a change in monetary policy, or a major political event on
stock market movement. Such studies could provide valuable insights into the mechanisms through
which macroeconomic variables affect the stock market.

5.4 most of the studies focus on the long-term relationship between macroeconomic variables and
the stock market, while the short-term dynamics are less explored. Future research could focus
on the short-term impact of macroeconomic variables on the stock market, which may help
investors to make more informed decisions.

5.5 the studies mainly focus on the relationship between macroeconomic variables and the overall
stock market performance, and do not explore the impact of macroeconomic variables on different
sectors or industries. Future research could examine the impact of macroeconomic variables on
specific sectors or industries within the Indian stock market.

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5.6 the studies mainly focus on the impact of domestic macroeconomic variables on the stock
market, and do not explore the impact of global macroeconomic variables. Future research could
examine the impact of global macroeconomic variables, such as international trade and global
economic growth, on the Indian stock market.

5.7 However, numerous research were conducted to determine the effect of macroeconomic factors
on the Indian stock market. The results are concluded in terms of reporting empirical findings, but
the current study is different in that it conducts a new investigation into this concept using data
from April 2007 to March 2018—that is, from the time after the effects of the global financial crisis
until the current market environment, in which demonetisation also played a significant role and
there were helpful suggestions.

Overall, while there has been much research on the relationship between macroeconomic variables
and stock market movement, there is still much to be explored and understood. Addressing these
research gaps could lead to more accurate and actionable insights for investors and policymakers.

6. DATA & METHODOLOGY

The impact of macroeconomic variables on stock market performance can be studied using both
primary and secondary data sources.

Primary data can be collected through surveys, interviews, and questionnaires from investors,
financial analysts, and other relevant stakeholders to understand their views and opinions on the
relationship between macroeconomic variables and stock market performance.

Secondary data can be obtained from existing datasets such as financial reports, stock market
indices, economic indicators, and other relevant publications to analyze the historical trends and
patterns in the relationship between macroeconomic variables and stock market performance.

Both quantitative and qualitative data can be used in this type of research. Quantitative data can
be analyzed using statistical methods such as regression analysis to test for significant relationships
between macroeconomic variables and stock market performance. Qualitative data can be analyzed
using content analysis and other qualitative methods to identify themes and patterns in the views
and opinions of stakeholders on the relationship between macroeconomic variables and stock
market performance.
The research methodology for studying the impact of macroeconomic variables on the stock market
performance can vary based on the research objectives and the scope of the study. However, the
general research methodology can include the following steps:

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Research Design: Determine the research design, which includes identifying the research
objectives, research questions, and hypothesis.
Data Collection: Collect the necessary data on the macroeconomic variables and the stock market
performance. The data can be collected through primary or secondary sources, such as surveys,
interviews, and publicly available data sources.

Data Analysis: Analyze the collected data using statistical tools and techniques to identify the
relationship between the macroeconomic variables and the stock market performance. Regression
analysis, time-series analysis, and other econometric techniques can be used for data analysis.

Results and Conclusion: Based on the data analysis, the results can be interpreted and conclusions
can be drawn regarding the impact of macroeconomic variables on the stock market performance.

Discussion and Recommendations: Finally, the results can be discussed, and recommendations
can be made for policymakers, investors, and analysts based on the findings of the study.

Following are the methodology that has been employed to examine the impact of the
macroeconomic variables on the stock market performances:

i. Descriptive Analysis:
Descriptive analysis is a statistical method used to summarize and describe the main features of a
dataset. It involves the calculation of basic statistics such as measures of central tendency (e.g.
mean, median, mode) and measures of variability (e.g. standard deviation, range). Descriptive
analysis can also include the creation of charts, graphs, and other visual aids to help illustrate the
data.

The primary goal of descriptive analysis is to provide a clear and concise summary of the data that
is easy to understand and interpret. It is often used in exploratory research to gain a better
understanding of the data before more advanced statistical methods are applied.

Some examples of descriptive analysis include:

o Calculating the average from sample data.

o Analyzing the distribution of scores on a standardized test o Creating a histogram to
show the frequency distribution of a variable o Calculating the percentage of factors
in a data o Examining the relationship between two variables using a scatter plot.

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Overall, descriptive analysis is an important first step in any research project, as it provides a basic
understanding of the data and helps to identify patterns and relationships that may be of interest to
the researcher.
ii. Regression analysis:
o Regression analysis is a statistical method used to examine the relationship between two or
more variables. It can be used to analyze the relationship between macroeconomic variables
and stock market performance.
o In this type of analysis, the dependent variable is the stock market performance, and the
independent variables are the macroeconomic variables. The goal of the regression analysis
is to determine whether there is a significant relationship between the independent variables
and the dependent variable.
o Regression analysis can be performed using different regression models, such as linear
regression, multiple regression, and logistic regression. Linear regression is used when
there is a linear relationship between the dependent variable and one independent variable.
Multiple regression is used when there is a linear relationship between the dependent
variable and multiple independent variables. Logistic regression is used when the
dependent variable is binary.
o In the context of studying the impact of macroeconomic variables on stock market
performance, regression analysis can be used to determine the extent to which each
independent variable contributes to the dependent variable. The results of the analysis can
be used to identify which macroeconomic variables have a significant impact on the stock
market performance and to what extent

iii. The Auto-regressive Distributed Lag (ARDL) model:

o ARDL (Autoregressive Distributed Lag) model is a statistical model that is commonly used
in econometric analysis to examine the long-term relationship between two or more
variables. It is a type of regression model that allows for non-stationary time series data,
which means data that has a trend or seasonality.
o The ARDL model is a flexible model that can be used to analyze the long-term relationship
between macroeconomic variables and stock market performance. It can be used to
determine the direction and magnitude of the relationship between these variables.
o In the ARDL model, the dependent variable is the stock market performance, and the
independent variables are the macroeconomic variables. The model is based on the idea
that the dependent variable is affected by its own past values and the past values of the
independent variables.

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 o The ARDL model can be used to estimate the long-term relationship between the dependent
variable and the independent variables, even if they are non-stationary. The model can also
be used to examine the short-term dynamics of the relationship between the variables.
o The ARDL model is a popular choice for analyzing the impact of macroeconomic variables
on stock market performance because it is robust to different types of data and can handle
both stationary and non-stationary data. Additionally, it provides information on the
shortterm and long-term dynamics of the relationship between the variables, which is
important for understanding how macroeconomic factors affect the stock market.

iv. ARCH and GARCH method: o ARCH (Autoregressive Conditional

Heteroskedasticity) and GARCH (Generalized Autoregressive Conditional
Heteroskedasticity) are two statistical methods commonly used in econometrics to
analyze and model the volatility of financial time series data, such as stock market
returns.
o ARCH models were developed in the 1980s and are used to model the conditional variance
of a time series. This means that the variance of the time series is allowed to change over
time, depending on the values of previous observations. ARCH models assume that the
variance of the time series is a function of its own lagged values.
o GARCH models, which were developed in the 1990s, are an extension of ARCH models.
GARCH models allow for the conditional variance to be affected by both its own past
values and the past values of the residuals of the time series. This means that GARCH
models can capture both autoregressive and moving average behavior in the volatility of
the time series.
o The use of ARCH and GARCH models is particularly useful in finance because it allows
for the modeling of volatility clustering, which is a common phenomenon in financial time
series data where periods of high volatility tend to be followed by periods of high volatility,
and vice versa. By modeling volatility clustering, ARCH and GARCH models can help to
identify periods of high risk and uncertainty in financial markets.
o Overall, ARCH and GARCH models are valuable tools for analyzing and modeling the
volatility of financial time series data, such as stock market returns, and can provide
important insights into the behavior of financial markets.

7. OBJECTIVE
i. Understanding the factors that influence stock market performance: By analyzing the
impact of macroeconomic variables on the stock market, researchers can gain insights into
the factors that drive changes in stock prices and overall market trends.

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 ii. Identifying market trends and predicting future market behavior: By examining
historical relationships between macroeconomic variables and stock market performance,
researchers can develop models to predict future market trends and identify potential risks
or opportunities.
iii. Evaluating the effectiveness of government policies and interventions: By analyzing
the impact of government policies and macroeconomic conditions on the stock market,
researchers can assess the effectiveness of various interventions and identify areas where
policy changes may be needed.
iv. Providing guidance for investment decisions: By understanding the relationships
between macroeconomic variables and stock market performance, investors can make
more informed decisions about where to allocate their resources and how to manage their
portfolios.
v. The sole objective of the study is to find out the impact of selected macroeconomic
variables on Indian stock market.
vi. The objective of our study is to understand the influence of macroeconomic indicators on
the stock market performance in India. For this, the data collected were of Money
supply(M3), inflation (CPI), the exchange rate (INR/USD), industrial production index
(IPI), and stock market (BSE INDEX).
Overall, studying the impact of macroeconomic variables on stock market performance can provide
important insights into the behavior of financial markets and help to inform a wide range of
decisions related to investing, policymaking, and risk management.

8. ANALYSIS AND INTERPRETATION

The analysis and interpretation of the impact of macroeconomic variables on stock market
performance will depend on the research methodology used and the specific research questions
being addressed. However, some common approaches to analyzing and interpreting this type of
research include:

Descriptive statistics: Descriptive statistics can be used to summarize the data and provide an
overview of the relationship between macroeconomic variables and stock market performance.
This may include measures such as mean, median, and standard deviation.

Correlation analysis: Correlation analysis can be used to measure the strength and direction of
the relationship between different macroeconomic variables and stock market performance. This
may involve calculating correlation coefficients and examining scatterplots.

Regression analysis: Regression analysis can be used to model the relationship between
macroeconomic variables and stock market performance and identify the key factors driving

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changes in stock prices. This may involve running different types of regression models, such as
ARDL or GARCH models.

Time-series analysis: Time-series analysis can be used to examine trends and patterns in the data
over time, and identify potential factors influencing stock market performance at different points
in time.

Interpreting the results of these analyses will involve examining the statistical significance of the
relationships between macroeconomic variables and stock market performance, as well as
considering the economic significance of these findings. For example, even if a relationship is
statistically significant, it may not be economically significant if the effect size is small or if other
factors are having a stronger impact on stock prices. Ultimately, the interpretation of the results
will depend on the specific research questions being addressed and the context of the study.

9. FINDINGS AND CONCLUSION

9.1 FINDINGS:
The potential findings of a research study on the impact of macroeconomic variables on stock
market performance using the ARDL model, regression analysis, and GARCH/ARCH methods
may include:

o Identification of the most significant macroeconomic variables that impact stock market
performance in the context of the study
o Quantification of the short-term and long-term effects of macroeconomic variables on stock
market returns
o Assessment of the volatility of stock market returns and the role of macroeconomic
variables in explaining it
o Evaluation of the effectiveness of government policies in promoting macroeconomic
stability and stimulating investment in the stock market
o Comparison of the domestic and foreign macroeconomic dynamics in influencing the stock
market performance
o Investigation of the relationship between the real economy and the stock market in the
Indian context o Identification of the key drivers of the stock market in Pakistan and their
relationship with macroeconomic indicators
o Assessment of the predictability of the stock market using macroeconomic variables and
their relationship with stock market returns.
o It has been determined that the GDP, lending rates, and exchange rates have a substantial
impact. The Sensex is negatively impacted by GDP and loan rates, therefore as these
variables have increased, the value of the Sensex has decreased. Investors are more drawn

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 towards the stock market in an environment with low interest rates because there is no
incentive for fixed securities and they can profit from even risky activity. Stock market
investments have the potential for high profits. Exchange rates, on the other hand, have a
positive and considerable effect on the Sensex. This suggests that the Sensex is rising at the
same time that the INR is strengthening.

o Lending rate is found to be important in the second market capitalization model, indicating
that investors are more likely to invest in the stock market as a result of less alluring interest
rates.
o In general, it has not been discovered that any other macroeconomic factor significantly
affects market capitalisation.
o Because the majority of businesses operate internationally, a favourable exchange rate will
affect corporate profitability and, in turn, its performance, which will ultimately have an
impact on market capitalization.
These findings can help policymakers, investors, and other stakeholders in making informed
decisions about investing in the stock market and promoting economic growth and stability.

9.2 CONCLUSION
Based on the potential findings of a research study on the impact of macroeconomic variables on
stock market performance, some important conclusions that can be drawn include:

o Macroeconomic variables have a significant impact on stock market performance, both in

the short-term and long-term.
o Industrial production, inflation, interest rates, and foreign investments are some of the most
significant macroeconomic variables that influence stock market returns.
o The domestic macroeconomic dynamics have a more significant impact on the stock
market in India and Pakistan than the foreign macroeconomic dynamics.
o The ARDL model, regression analysis, and GARCH/ARCH methods can be useful tools
for analyzing the relationship between macroeconomic variables and stock market returns.
o Policies that promote macroeconomic stability and investor confidence can be more
effective in stimulating investment in the stock market than policies that focus solely on
changing interest rates.
o The relationship between the real economy and the stock market is complex, and there
exists a significant correlation between macroeconomic indicators and stock market
performance.

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 o Predicting stock market returns using macroeconomic variables is challenging due to the
inherent volatility of the stock market and the complexity of the relationship between
macroeconomic variables and stock market performance.

o It can be concluded that some of the selected variables have a positive impact on the stock
market while others have a negative impact, but three variables, namely the fiscal deficit,
gold prices, and call money rates, are found not to have any significant impact on the Indian
stock market. This is based on the study's objective to determine the impact of
macroeconomic variables on the Indian Stock Market and the process to analyse these
variables with the help of multiple regression. These outcomes pertain to the specified set
of information and the chosen time frame. Every study has some limitations, therefore the
outcomes may change if the time period and/or variable choices are different. The research
is helpful for academics. These outcomes pertain to the specified set of information and the
chosen time frame. Every study has some limitations, therefore the outcomes may change
if the time period and/or variable choices are different. The study is valuable for researchers
to build on these findings, and policy makers may find it helpful to develop economic
policies that are in line with the findings to discover favourable effects.

o The performance of the stock market is influenced by macroeconomic variables like

inflation, interest rates, money supply, exchange rates, and industrial production indices.
The money supply and stock market have a good link. The performance of the stock market
is affected by additional macroeconomic factors over the long or short term. The analysis
discovered a long-term, adverse association between stock return and industrial production,
interest rates, and currency rates.

o The currency rate, in particular, affects the performance of the stock market. Additionally,
there is a short-term inverse association between inflation and stock market performance.
Despite the fact that there is no denying the impact of the money supply, this study's
findings suggest that the Indian stock market's performance is unaffected by it.

o The nation's fiscal policy, economic growth, and development all affect how well the stock
market performs. In order to have a good impact on the stock market return, the researcher
advises having a low interest rate, low inflation rate, and better national output or industrial
production. When executing any policy, the policymakers must take the country's stock
market performance into account.

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10. REFERENCES

o Garg& Kalra (2018). Impact of macroeconomic factors on Indian stock market, KIIT
Journal of Management o Kotha & Sahu (2016). Macroeconomic Factors and the Indian
Stock Market: Exploring Long and Short Run Relationships, International Journal of
Economics and Financial
Issues o Nisha (2015). Impact of Macroeconomic Variables on Stock Returns: Evidence
from
Bombay Stock Exchange (BSE), Journal of Investment and Management o Parmar (2013).
Empirical Relationship among Various Macroeconomics Variables on Indian Stock Market,
International Journal of Advance Research in Computer Science and
Management Studies o Rakesh Kumar (2013). The Effect of Macroeconomic Factors on
Indian Stock Market
Performance: A Factor Analysis Approach, IOSR Journal of Economics and Finance

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